Winning Traits of Amazon-Proof Retailers

Brick-and-Mortar Winners Usually Have One of These Traits.

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The impact that Amazon.com has had on the retail landscape is undeniable. Amazon, the king of e-commerce, has pushed prices down, which has forced traditional retailers to re-invent, and it has forced most major retailers to embrace e-commerce. However, e-commerce has really only "killed" one retailer-Borders-and it can be argued that Borders fate was inevitable anyway. There are still plenty of strong brick-and-mortar retailers worthy of your investment.

So what characteristics do the best brick-and-mortar business have? Well, each year the National Retail Federation's hot list showcases the fastest growing retail chains, most of which are brick-and-mortar stores. A select group has made the hot list every year since 2006, and as it turns out they share a few key characteristics that have helped them thrive in today's retail environment.

Low price leaders are at an advantage

Apparel retailers like Ross, Marshall's, and TJ Maxx, have done well in this environment as they've carved out a niche for name brand at low prices. Ross, who's slogan is "dress for less," has made the NRF's hot list since 2006 and it has grown revenue 9% annually over the past five years, while EPS has grown 20%. That's not bad, considering other department stores, like JC Penney and Sears, have struggled to stay afloat in the current retail environment. Ross, and off-priced department stores like it, buy name brand clothes during off-cycles from a wide network of vendors, which allows them to sell goods dramatically cheaper than most retailers.

Since these retailers have built in advantages that allow them to keep prices low, e-commerce is much less of a competitive threat. 

Trends matter

Two other companies that offer low prices and have made NRF's list since 2006 are Dollar Tree and O'Reilly Automotive. Both companies are also exploiting growing consumer trends; Dollar Tree is profiting off of frugal consumers preference for smaller scale stores, and O'Reilly is benefiting from the rise of DIY-er's.

 

O'Reilly's sector as a whole, car parts stores, has been on fire (with the exception of the woeful Pep Boys). The average age of cars in the U.S. is soaring, and millennials prefer fixing over replacing, which is a nice recipe for long-term growth. Naturally, some of the frugalness that has led people to O'Reilly and Dollar Tree is a reflex to the crash of 2008 and American's are still buying plenty of new cars and premium goods. However, given their sustained run, it could be argued that a certain segment of consumers has fundamentally switched gears in a way that has made these businesses more appealing. 

Some things are just better in-person

Amazon started as an online bookseller and became an immediate threat to bookstores. Since it carried a much wider selection than traditional bookstores, including many books that were out of circulation, Amazon had an advantage. Not to mention, a book is not something you really need to see in-person to buy; the same holds true for electronics and cell phones, the two other big e-commerce sellers. But some things, just don't lend themselves well to an online format. Take tractors, for instance, Tractor Supply Company, the largest supplier of rural lifestyle retail stores, has been selling tractors, motors, and trailers, since 1938 and it has been on the NRF hot list since 2006 as well.

Tractor Supply Company falls in a similar category as Lowe's and Home Depot, who've also done very well in recent years. Their products are too large, too variable, and too important to buy online. A good rule of thumb: if you wouldn't feel comfortable buying a stores product without seeing it in person, then that retail chain may have some staying power. For instance, you'd likely buy a best-selling book online, but you may think twice about buying a couch before sitting on it.  
 

Other factors

Keep in mind, the NRF hot list only tracks top-line revenue. You'll still want to evaluate a stock's same-store sales, earnings, valuation, and so on before buying shares. However, these stocks do provide a glimpse at what types of retailers can thrive in today's retail landscape. Ultimately, today's retailers need to offer something that can only be delivered in-person, and they need to offer a unique experience that gives customers a reason to come into the store again and again.

 

Disclosure: I do not own shares in any of the stocks mentioned nor do I intend to buy any over the next 72 hours. Never buy or sell any stock based solely on what you read here (or anywhere else). Always do your own research.